Canada: Lessons Learned from our Northern Neighbor

On July 31, 2012, the National Chamber Foundation (NCF) hosted a number of notable Canadian and American business leaders for an event titled “Canada: The Northern Light: A Partner in Growth and Opportunity.” 

As a part of NCF’s Business Horizon Series, the program explored the decisions that Canada has made post-NAFTA to advance its economy. The event focused especially on the issues of international trade, energy, immigration, and taxes.

R. Bruce Josten, the U.S. Chamber’s Executive Vice President, Government Affairs opened the program by highlighting some of the lessons learned from Canada’s actions. Below, we are proud to feature his remarks and insights. 

 
 

“Canada: The Northern Light: A Partner in Growth and Opportunity”


National Chamber Foundation 

July 31, 2012

 

Introductory remarks by

R. Bruce Josten, Executive Vice President Government Affairs

U.S. Chamber of Commerce 

 

 

Good morning and welcome to the National Chamber Foundation’s Business Horizon conference on “Canada: The Northern Light.”

 

So, why are we conducting a conference on Canada? 

 

I want to provide some context to that question in my remarks and suggest that our policymakers can learn much by looking north. 

 

Canada offers us some important lessons in policy and results. 

 

From 2001 – 2010, Canada grew faster than any other G-7 country. This growth was the result of a diversified economy, its foundations built upon low corporate taxes, prudent fiscal management and financial regulation; a business climate that rewards innovation and entrepreneurship; and an open economy that welcomes foreign direct investment.

 

As a result of the actions it took, Canada has the distinction of being the only G-7 country to have recouped virtually all of its output and employment losses from the recent global recession.

 

The Canadian federal government has posted 11 consecutive budget surpluses and some of that surplus was used to pay down Canada’s national debt. As a result, Canada entered the global recession in much better shape than most other advanced economies.

 

Foreign direct investment (FDI) in Canada has more than doubled in just over a decade. Foreign investors in Canada benefit from one of the lowest overall tax rates on new business investment among OECD countries and the lowest such rate in the G-7.

 

Simply put, with a stable fiscal environment, governments in Canada have more room to implement policies such as:

 

Reductions in corporate income taxes;

Investments in infrastructure;

Research and development tax credits; and

Reductions in import tariffs.

 

 

Canada and the United States share a deep and mutually beneficial commercial relationship.  More than two-thirds of the Canadian trade in goods was with the America in 2010. More than $1.7 billion in goods and services cross the Canada-U.S. border every day. 

 

We commend Canada for recently enacting modern-day copyright reforms.  While those reforms represent a significant and positive step forward, we urge the Canadian government to address a number of other outstanding intellectual property (IP) issues that would provide greater protections against online theft and certainty for innovative pharmaceuticals.  We look forward to continued progress on IP issues in Canada, including in the context of the Trans-Pacific Partnership.

 

In May of 2012, Ed Fast, Minister of International Trade and Minister for the Asia-Pacific Gateway announced that the Canadian “government’s top priority is the economy—creating jobs, growth and long-term prosperity for Canadian workers, businesses and families.”

 

Notably, the Harper Government announced that the “Economic Action Plan 2012” will, “following consultations with the business community—including the critically important small and medium-sized business sector— align Canada’s trade and investment objectives to ensure that Canada is branded to its greatest advantage in high-growth, priority markets.”

 

Mr. Fast said that he looks forward to receiving advice from these knowledgeable Canadian business leaders, all of whom are advocates of a broad and ambitious Global Commerce Strategy. 

 

Additionally, after extensive consultations with Canadian industries, Ottawa unilaterally eliminated tariffs on 1,755 different types of machinery, equipment and other manufacturing materials, making Canada the first tariff-free zone in the G-20 for manufacturers.

Canada has made infrastructure investments a national priority and, as a result, Canada's public-private partnership approaches are a model for the world, according to Malcolm Bairstow, Ernst & Young's Global Infrastructure and Construction Leader.

 

Canada has transformed itself economically over the last 20 years. 

 

Canadian taxes have been reduced with the goal of improving incentives for work, savings, investment and entrepreneurship. Tellingly, the last three Canadian elections have all had key debates on tax relief—not whether there should be tax cuts, but rather what type of tax cuts.

 

Canada's government has grown smaller.  Total government spending as a share of the economy peaked at a little over 53% in 1993.  Through a combination of spending cuts in the 1990s and spending restraint during the 2000s, it declined to a little under 40% of GDP by 2008. 

 

Canada’s personal income tax rates have been reduced, and the income thresholds for all rates have been increased and indexed to inflation.  Canada has also reduced capital gains taxes twice (the rate is now 14.5%) and, cut the national sales tax to 5% from 7%.

 

Government austerity has been accompanied by prosperity.  Canada began reforming formerly untouchable programs: welfare and the Canada Pension Plan (CPP), equivalent to Social Security in the U.S. Over three years, federal and provincial governments agreed to changes that included investing surplus contributions in market instruments such as stocks and bonds, curtailing some benefits, and increasing the contribution rate.  The CPP is financially solvent and will be able to weather the retiring baby boomers.

 

And, while we have a different view with respect to health care than Canada, the government deserves credit for restructuring its government pension and welfare plans.

 

Americans can learn much by looking north.

 

In Canada, because of corporate tax cuts, businesses are making additional investment projects profitable on an after-tax basis.  The increase in economic activity and profits is accompanied by additional hiring, increasing the taxable base of corporate income.

 

By comparison, the U.S. federal rate has remained unchanged since 1986 while all of our trading partners have lowered theirs over the past 15 years, most of them multiple times. The United States is falling behind by standing still.

 

Another transformational play undertaken in Canada nearly simultaneously to reducing the size and cost of government while reducing tax rates is encouraging domestic exploration and extraction of Canada’s domestic energy sources.

 

One key factor for Canada's more robust growth is its strong commitment to energy.  Unlike the United States, Canada’s government treats its energy resources as assets that should be used for the public good. 

 

Equally important, unlike the United States, the Canadians understood that the regulatory review process is too convoluted, too long, and too expensive.  As part of the goal to ensure timely and predictable project reviews, Canada, unlike the United States, now has fixed timelines for the beginning-to-end review process, which range from 12 to 24 months depending on the type of review and it eliminated duplication of project reviews.

 

The federal government projects that over the course of the next ten years, that half a trillion dollars worth of new projects will start operating in Canada’s energy and mining sectors.  Much of America's vast untapped energy potential lies dormant because regulators have spent the past three years throwing sand in the gears of the permitting process for exploration and exploitation on federal lands. 

 

Separately, TransCanada has been trying since September 2008 to get a permit to build the Keystone XL pipeline from Alberta to the Gulf Coast. 

 

A glimpse of what all this has cost the U.S. economy can be seen by looking north to Canada.  Alberta's oil and gas industry supports more than 271,000 direct jobs and hundreds of thousands of indirect jobs in sectors such as construction, manufacturing and financial services.  There are also some 960 American companies involved in Alberta energy, supplying equipment and technology, among other things.

 

Yet Keystone XL is only a fraction of the potential that could be released if our federal government changed its energy policy.  In a study commissioned by the American Petroleum Institute and released last year, the energy consultancy Wood MacKenzie estimates that pro-development policies could, by 2030, “support an additional 1.4 U.S. million jobs, and raise over $800 billion of cumulative additional government revenue.”

 

Canada has recovered all the jobs it lost in the 2009 recession, and Alberta's oil sands are a big part of that.  The province is on track to become the world's second-largest oil producer, after Saudi Arabia, within 10 years.

 

The idea here is straightforward—to make Canada the most attractive country in the world for resource investment and development, and to enhance its world-class protection of the environment for future generations of Canadians.

 

The U.S. Bureau of Labor statistics measured American unemployment at more than 8% last month, slightly higher than Statistics Canada's number for Canada, but long-term unemployment—those looking for work for more than a year—in the U.S. accounts for 41% of job-seekers last month. 

 

The most recently available Canadian rate was less than a fifth of that, while the labor-force participation rate in Canada has exceeded that of America since May 2002, and by more than 2% since November 2009.

 

Canada has taken other actionable steps to prepare for the future. 

 

In the last decade, the province of Ontario, Canada’s largest province, dramatically improved its education system to become one of the best in the world.  Its innovative strategy offers a blueprint for reform.

 

Ontario public schools follow a model embraced by top-performing hospitals, businesses and organizations worldwide.  Specifically, they do five things in concert—remain focused, build relationships, persist, develop capacity, and spread quality implementation.

 

The McKinsey Group, the Organization for Economic Co-operation and Development, the National Center on Education and the Economy in Washington, D.C. and Harvard's Program on Education Policy and Governance have all done recent case studies on Ontario's education system, concluding that it is one of the most improved and highest performing in the world.

 

The Canadian Ministry of Education selected three priorities—literacy, math and high school graduation—with a commitment to raise the bar for all students and close achievement gaps between all groups.  There are other goals, of course, but these three are non-negotiable and take precedence because they leverage so many other learning goals.

 

The provincial government also developed strong two-way partnerships and collaboration, especially between administrators and teachers, and in concert with teachers' unions. By focusing on teacher development, Ontario was also able to raise teacher accountability.

 

In brief, the net result is an education system that has the characteristics of a high-performing organization: relentless focus, interactive pressure and support, a preoccupation with results and how to improve them, a culture of mutual commitment, and collaborative competition, where there is no limit to what is being attempted. 

 

The fact that this strategy develops leaders at all levels—leaders who focus on results, as they help develop other leaders—means that sustainability is built into the whole enterprise. 

 

Ontario isn't perfect.  Yet it proves that large-scale reform can be accomplished in school systems in fairly short periods of time.

 

Another area worth learning from is immigration policy. Canada has a high percentage of foreign-born residents relative to the United States.

 

Canadian immigration policy is centered on recruiting talented immigrants with abilities the country needs.  Those individuals can apply for work visas themselves; they don't even need to have an employer.  The Canadian government awards points toward the visa, with extra points for science education, technical skills and work experience.  

 

The results of the system are evident in Vancouver, where American high-technology companies have large research laboratories and offices.   The people working in these offices are almost all foreign graduates of American universities who could not get work visas in the U.S.  They moved a few hours north to Vancouver, where they live in a city much like those on the American West Coast; except, of course, that they will pay taxes, file patents, make inventions and hire people in Canada.   

 

Sixty-two percent of permanent-resident visas in Canada are based on skills, while the remainder is for family unification.  In the United States, the situation is almost exactly the reverse: two-thirds of America's immigrants enter through family unification, while only 13% of green cards are granted because of talent, merit and work.  In fact, it's actually gotten worse over time in America.  The cap on applications for H1-B visas (for highly skilled immigrants) has dropped in half over the past decade.

 

The U.S. cannot continue down its current path and hope to remain the world's main economic power and global beacon of prosperity.  It must reverse course.  It can happen. 

 

Canada has reversed course, cutting taxes and launching privatization efforts. The tax cuts have acted as a stimulus.  Moreover, exploiting natural resources provided a growing revenue stream while privatization reduced government debt helped spur economic growth by creating a more dynamic industrial structure.  

 

Perhaps the most promising instruction from the Canadian experience is that the country's fiscal reforms undermine the Keynesian notion that cutting government spending harms economic growth.  Canada’s cuts were coincident with the beginning of a 15-year boom that only ended when the world economy dragged Canada into recession in 2009.

 

Lessons Learned


Canada offers U.S. policymakers a useful roadmap for: 

1) Lowering taxes and raising even more tax revenues, and

2) Encouraging, rather than discouraging domestic fossil fuel production, Canada has made itself and by extension the U.S. more energy secure. 

 

While Canada benefits from the flow of additional tax revenues and royalties and jobs, followed by even more income tax revenues, the United States stands still and falls further behind.

 

Americans can learn much by looking north.  There are salient lessons to be derived by those of us in the U.S. from looking at Canada's economic metamorphosis. 

 

Canada’s economic reforms included furthering free trade, privatization, spending cuts, sound money, corporate tax cuts, personal tax reforms, balanced federal budgets, block grants and decentralizing power by cutting the central government.

 

Those all sound like things that we ought to pursue in America.  The political systems of the two countries are different, but Canada’s pro-market reform lessons are universally applicable.

 

We can choose to emulate at least some of the approaches taken by our neighbors in reversing the path of their previously plunging economy.